This section from the introductory chapter of the book also covers the Enduring Power of Attorney – this sub-section is not included in the following excerpt.

(a) Introduction

In the context of SMSFs and succession planning, capacity is an essential consideration.

Capacity is the ability to make legally recognised decisions. Should an individual lose their capacity to make decisions, the decisions will be invalid and not legally enforceable. It is therefore pertinent to consider the definition of capacity and the relevant legal tests.

Courts do not apply a unified test in all situations when ascertaining whether an individual has the capacity to make a decision. In Gibbons v Wright (1954) 91 CLR 423, 438, the High Court said:

[T]he mental capacity required by law in respect of any instrument is relative to the particular transaction which is being effected by means of the instrument, and may be described as the capacity to understand the nature of the transaction when it is explained.

Accordingly, it is not meaningful to refer to an individual’s incapacity without first specifying the context and type of capacity.

(b) Wills

In the context of wills, capacity refers to the will maker (ie testator or testatrix) and their ability to make a valid will. Cockburn CJ stated the seminal test in Banks v Goodfellow (1870) LR 5 QB 549, 565:

It is essential to the exercise of such a power that a testator shall understand the nature of the act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and, with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties — that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind has been sound, would not have been made.

Mental capacity is demonstrated if a will maker is of “sound mind, memory and understanding” (Tasmanian Perpetual Trustees Ltd v Rourke [2012] TASSC 44 at [2]).

In effect, what is required of will makers (in addition to being of sound mind) is that they:

understand the nature and effect of a will

know the nature and extent of their property

comprehend and appreciate the claims to which they ought to give effect, and

are not affected by delusions that influence the disposal of their assets at the time they are making their will.

This was applied in Tasmanian Perpetual Trustees Ltd v Rourke [2012] TASSC 44. In this case, the plaintiff and executor of a will applied to have the will authenticated as part of the grant of probate. This was denied on the basis that the will maker (Mrs Betty Artherton) was not of sound mind, memory and understanding. After suffering several strokes in 1991/92, the will maker’s mental capacity declined rapidly. This was evidenced by a lack of memory, paranoid delusions of her daughter stealing her car, and diagnosis by health professionals of dementia and a rapidly declining memory. The will maker made numerous changes to her will, the last of which (signed in 1995) deprived her daughter of any beneficial interest. While it was accepted that “Mrs Artherton knew exactly what she was doing” when this will was signed, it was found that “when she did so she lacked testamentary capacity, as she was influenced by a paranoid delusion that the defendant had stolen the proceeds of the sale of her car”.

Evidence plays a very important role when ascertaining whether there is a lack of capacity (Tasmanian Perpetual Trustees Ltd v Rourke [2012] TASSC 44 at [60]):

In cases where the evidence raises a doubt about the testator’s testamentary capacity, it is necessary that there be a vigilant examination of the whole of the evidence.

The relevant standard of proof is the balance of probabilities (Worth v Clasohm (1952) 86 CLR 439, 453), which requires the conscience of the court to be satisfied that the document is not, on balance, the true will of the will maker.

Although this evidential burden was clearly met in the Rourke decision mentioned above, it may not always be so clear. Even the decision in this case was nuanced, as despite being aware of what she was doing when she made a new will, the will maker was nonetheless found to lack testamentary capacity.

At first glance, this may seem contradictory. However, this simply demonstrates that the court’s approach will vary significantly based on the circumstances of the case, and the symptoms of the health disorder (if any) suffered by the will maker. Individuals with dementia may have the capacity to make simple wills but not complex ones; there is no absolute rule (Nick O’Neill and Carmelle Peisah, Capacity and the Law (2011), 1.2). Additionally, those with mental illness may be able to make wills during lucid periods (Perpetual Trustee Co v Fairlie-Cunninghame (1993) 32 NSWLR 377). A finding of soundness of mind is highly dependent upon the facts of the case.

Example 1

At age 70, Jack decides to prepare his will. In it, he stipulates that his daughter is to receive the title to his home and his son all of his personal chattels. At the time, Jack was suffering from dementia. Upon his death, his son challenges the will on the basis that Jack lacked the capacity to make this decision. The court finds that Jack was capable of making the decision and his will for the following reasons:

the will was extremely straightforward

the decision was made during a period of lucidity (it is a medically recognised fact that dementia sufferers experience periods where they are entirely aware of their decisions and are completely sound of mind), and

Jack’s soundness of mind while signing the will was confirmed by his witnesses, one of whom was a doctor.

Although the outcome in the above example accorded with Jack’s wishes, it is clear that it is better to prepare for succession well in advance. This will reduce the likelihood of the will maker’s capacity to make a will being questioned upon its execution, and will minimise any uncertainty.